Crude halts decline as demand seen burning through shale output

By Jessica Summers on 2/12/2018

NEW YORK (Bloomberg) -- Crude edged higher after the worst weekly decline in two years as OPEC shrugged off the threat that U.S. shale drillers will swamp the market with excess supplies.

Futures in New York advanced, breaking a six-session string of losses. Strong demand for crude coupled with restrained output from OPEC and allied suppliers will erase any remaining glut this year, United Arab Emirates Energy Minister Suhail Al Mazrouei said. The price gain was muted as the U.S. government lifted its shale oil supply forecast and weakness in gasoline and diesel markets bled over.

Oil prices are supported by “statements from OPEC telling us they believe compliance to the cuts is going to be at historic highs,”  Bart Melek, head of global commodity strategy at TD Securities in Toronto, said by telephone. “Ultimately, the market is well-supported around $60. We do see the market rebalance. Inventories will continue to drop.”

The U.S. benchmark crude contract lost almost 10 percent of its value last week amid concerns about the broader economy. Kuwait Oil Minister Bakheet Al-Rashidi characterized the selloff as a “correction only.” Meanwhile, OPEC compliance with crude output cuts rose to a record 136% in January, according to Bloomberg calculations.

West Texas Intermediate crude for March delivery added 9 cents to settle at $59.29/bbl on the New York Mercantile Exchange. Total volume traded was about 16% above the 100-day average.

Shale growth

Brent for April settlement declined 20 cents to end the session at $62.59 on the London-based ICE Futures Europe exchange, and traded at a $3.51 premium to WTI for the same month.

Shale drillers in places such as West Texas, Oklahoma and North Dakota may imperil the carefully-laid plans of the Organization of Petroleum Exporting Countries and fellow travelers like Russia and Mexico. The number of rigs searching for U.S. oil jumped 34% in the past year and the Energy Information Administration projects shale-oil output to rise 110,000 bpd in March.

As a result, nationwide crude production is expected to exceed 11 MMbpd before the end of this year. OPEC’s own analysts on Monday upped their estimate for how much oil non-cartel suppliers will pump this year by 250,000 bpd to 1.4 MMbpd.

Late in Monday’s trading session, U.S. government forecasters boosted their estimates for the backlog of unfracked oil wells explorers have amassed -- an indicator of future supply growth -- as well as how much crude domestic drillers will pump next month.

“Shale is coming and the expectation is that it will come stronger than in 2017, and this is something that we have to watch,” Al Mazrouei said Monday in an interview in Dubai. “But considering all factors, I don’t think it will be a huge distorter of the market.”

Gasoline weakness

OPEC Secretary General Mohammad Barkindo said the cartel and its non-OPEC partners need to continue cooperating beyond 2018 and that their accord is still a “work in progress.”

Gasoline futures fell 1.3% to settle at $1.6785/gal. The gasoline crack spread, a rough measure of the profit from refining crude into the fuel, declined to the lowest level since this time last year.

“It’s very hard to get a market to go up on an outright basis when cracks are clearly aimed downward,” Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida, said by telephone. “Production of refined products is very high right now.”

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